In order to encourage foreign investment, the Finance Ministry is likely to introduce safe harbour rules for transfer pricing of capital transactions which will bring about certainty in taxation of such deals.

The Finance Ministry, according to sources, may introduce the changes in the Budget to be presented by Finance Minister Arun Jaitley on July 10.

The Ministry is considering 20 percent mark up under the safe harbour rule, which would mean that transactions following the norms would not the scrutinised by the tax authorities under the transfer pricing law.

The issue of transfer pricing - transaction prices between separate entities of large firms - has generated much heat in India involving MNCs operating here such as Vodafone, Shell, WNS and Nokia.

Absence of safe harbour rules with regard to capital transactions between group companies have led to a lot of transfer pricing disputes and there has been demand from the industry for more clarity in this regard.

Sources said the safe harbour provision will be applicable prospectively and the Finance Ministry believes it will bring down litigations.

Under the safe harbour rules, the tax department accepts the transfer price provided by the assessee. Companies can take refuge under the norms to avoid long-drawn out legal tangle with the government.